An auditor is an independent professional (or firm) that evaluates a company’s accounting records and reporting processes and then provides an opinion or assurance about the reliability of its financial statements.
What auditors do (high-level)
Audit work typically involves:
- understanding the business and identifying areas of reporting risk,
- evaluating internal processes and controls,
- testing transactions and account balances (often using sampling),
- assessing estimates and judgments (provisions, impairments, revenue recognition),
- issuing an audit opinion.
Why auditors matter economically
Auditors exist because of information problems:
- asymmetric information: outsiders cannot directly observe the firm’s true financial condition,
- agency problems: managers may have incentives to overstate performance or hide risk.
Independent auditing can reduce those frictions, which can lower financing costs and improve trust in markets. But the value of an audit depends on credibility and independence: if incentives are weak or conflicts of interest are strong, the assurance value falls.
Internal vs external auditors
- External auditors are independent of the company and report to stakeholders through an audit opinion.
- Internal auditors are employed by the organization and focus on improving controls, risk management, and governance.
Practical example
A lender considering a large loan to a company cares about whether reported profits and assets are reliable. A clean audit opinion does not guarantee “no problems,” but it provides evidence-based assurance that reporting is broadly consistent with standards.